Tax season is knocking on the door and taxpayers are searching for ways to save on the taxes. A common dilemma which any taxpayer is facing today is choosing between Equity Linked Savings Schemes (ELSS) and the new optional tax regime which requires them to forego all the deductions.
ELSS are also known as tax-saving funds, as they provide taxpayers with an option to claim tax deductions up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Long term investment goals and ELSS can go hand in hand if a person ignores the current volatility of the market and invests in the mutual funds.
Features of ELSS Mutual Funds
- ELSS funds invest a large percentage of their portfolio in equity.
- A compulsory lock-in period of 3 years, meaning that an individual cannot touch the invested amount during this time. This is the shortest lock-in period amongst all tax saving options.
- A taxpayer enjoys both benefits of capital appreciation from investments in equity along with tax-saving options.
- A person can opt for dividend pay-outs if they wish to receive regular income or go with the growth option for capital appreciation.
- Though, ELSS Funds come with some risk but are known to generate returns in the range of 10-12% in the long run, which is highest in the tax-saving options.
The new tax regime which was introduced in Budget 2020 offers taxpayers with reduced tax slabs which naturally helps them save on their income. As per the new tax regime which is optional, an individual shall pay tax at a reduced rate of 10% for the income falling between Rs 5 lakhs to Rs 7. 5 lakhs against the current rate of 20%, those earning between Rs 7.5 lakhs to Rs 10 lakhs will pay at a reduced rate of 15% against the current rate of 20%.
Similarly, for those with income falling between Rs 10 lakhs to Rs 12.5 lakh the taxpayer will pay at a reduced rate of 20% against the current rate of 30%. The income between Rs 12.5 lakhs to Rs 15 lakhs will be taxed at the reduced rate of 25% against the existing rate of 30%. Income above Rs 15 lakhs will be continued to be taxed at the rate of 30 %. Those individuals who earn up to Rs 5 lakhs are not liable to pay any tax under the new optional regime.
For those looking towards wealth creation through investments and other tax-saving instruments, ELSS funds are the most viable options available in the market today. However, if you are a person that earns in the lower-income brackets, for example, under 7 lakhs, opting for the new tax regime makes more sense as you will have to pay less income tax and thereby increase your savings.
Introduction of the new tax regime by the government has reduced the popularity of ELSS funds, though experts differ on the opinion and say that it is very early to give a verdict on the fate of ELSS as it is one of the best options available in the smart investments market and tax saving.